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How to use the summary approval procedure to vary company capital on reorganisations

A key innovation under the Companies Act 2014 (the "Act") is the summary approval procedure ("SAP"). This is the new streamlined process for the authorisation of up to seven different types of restricted activities that would otherwise be prohibited or, in some cases, require High Court approval. The seven restricted activites are outlined below:

Restricted Activities

Variation of company capital on reorganisations

Share capital reduction

Financial assistance for the acquisition of shares

Prohibition on pre-acquisition profits or losses being treated in a holding company’s financial statements as profits available for distribution

Loans to directors and connected persons

Domestic merger

Members’ voluntary winding up

VARIATION OF COMPANY CAPITAL ON REORGANISATIONS USING THE SAP

Variation of company capital on reorganisation is when a company varies its capital by entering into a transaction to dispose of assets, undertakings or liabilities or a combination of both to another corporate body in return for shares or securities being allotted to the memebrs of the company.

The Act allows private limited companies, designated activity companies, companies limited by guarantee and unlimited companies to vary their company capital on reorganisation under the SAP without the need for court intervention (provided the company’s constitution does not prohibit the company from varying its capital). This provides a quicker, easier and cheaper way to vary company capital. This procedure is not available to PLCs which must obtain High Court approval for any proposed variation if company capital on reorganisation.

In order to effect the variation of company capital on reorganisation by SAP, certain steps must be taken by the company:

Variation of company capital on reorganisations using the SAP

Shareholder Approval

The shareholders must pass a special resolution (75%) approving the variation of company capital on reorganisation

Board Meeting

Must be within 30 days of the passing of the shareholder resolution

All/a majority of the directors make a declaration setting out:

the circumstances and nature of the transfer or disposal

the person(s) to or for whom the variation of company capital on reorganisation is made

details of the assets and liabilities before and after the proposed variation of company capital on reorganisation » their opinion, having made full inquiry, that the company will remain solvent for a period of 12 months following the proposed variation of company capital on reorganisation

CRO Filings

The declaration must be lodged with the Companies Registration Office (CRO) within 21 days of the restricted activity being commenced

Declaration must be accompanied by a report of the statutory auditors of the company which states that the declaration is “not unreasonable”

The shareholders’ resolution must be lodged with the CRO within 15 days of its passing

AUDITORS REPORT

The declaration made by the directors must be accompanied by a report in a prescribed form by a person who is qualified to be a statutory auditor of the company which states that the declaration is “not unreasonable”.

The amount of work involved in preparing this declaration will depend on the complexity of the company’s operations. One practical way to reduce the work involved would be for the declaration to be made shortly after the completion of the annual audit.

RISK OF PERSONAL LIABILITY

Where a director makes a declaration without reasonable grounds that the company is solvent, the directors may be found to be personally liable for all of the debts of the company. If the company is wound up within 12 months after the date of making the declaration and its debts are not paid up or provided for within 12 months after the commencement of the winding up, it will be presumed, until the contrary is shown, that each director who made the declaration did not have reasonable grounds for doing so.

To demonstrate the reasonableness of their actions, directors can review at board level the projected cash-flow and working capital for the coming 12 months. Depending on the timing of the capital variation, this process can be done as part of preparing the annual financial statements.

AN EFFICIENT AND COST EFFECTIVE MECHANISM

The SAP reduces the complexity involved in varying company capital on reorganisation and allows certain Irish companies an efficient and cost effective mechanism for such variation. This is a significant positive development for Irish companies.

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